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TMI Blog2012 (11) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 14A of the IT Act, 1961. 2. The learned CIT(Appeals) has erred in law and on facts of the case in deleting the addition of Rs.38,26,20,327/- made on account of Long Term Capital gain." 3. The assessee is engaged in the business of extending financial assistant by way of Term Loan, Financial Services and implementation of joint and associates sector project in the State of Gujarat. The ld. A.O. made addition of Rs.23,97,98,520/- u/s.14A of the IT Act. The appellant had made investment of Rs.199.83 crores in various shares of the Company quoted or unquoted. During the year assessee had paid interest of Rs.60.61 crores on various loans taken to invest or to maintain the investments. Ld. A.O. had given reasonable opportunity of being heard on disallowance u/s.14A of the IT Act as assessee has dividend income and borrowed fund had been used for investment in shares. The appellant's claim was that all the investments on which it had received dividend had been made by it before 1997 and deduction u/s.80M was claimed by the appellant. The Assessing Officer had observed as under: "3. DISALLOWANCE u/s 14A: From the statement of accounts, it was observed that the assessee has invested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own above it is an established fact that all the investments made before 1997-98 are made from the own funds and no interest expenses are incurred for the same. The said facts are accepted by the Commissioner of Income Tax (Appeals) and Income Tax Tribunal also and hence provisions of section 14A is not applicable to the investment made before 1997-98. Accordingly we submit that the disallowance as proposed by you can not be made under section 14A as no part of the investment was made out of borrowed funds. We have to further state that the we have enough funds i.e. capital and non cash expenses debited to profit and loss account i.e. cash available for the investments in the tax free securities as shown below : Share capital Rs. 256.97 crores Depreciation reserve Rs. 5.81 crores Provision for NPA Rs. 110.86 crores Total Funds Investments Rs. 373.64 crores Investments Rs. 199.83 crores We now draw your attention to the order of the CIT(A) for A.Y. 2004-05, the CIT(A) has considered all the above submissions made by us and has deleted disallowance made by the Assessing officer. We here reproduce the decision of the CIT(A) as under : We submit that looking at the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A was considered in the light of the facts and circumstances involved and also the legal provisions of section 80M and section 14A of IT Act. After taking a holistic view of the above referred aspects, it is found that the assessee's contention is devoid of legal and factual grounds, therefore, the same is not acceptable for the following reasons: (i) Regarding the relevance of the CIT(A)'s decision, as relied upon by the assessee, it is felt that the same is not applicable in the instant case for the reason that the decision of CIT(A) of deleting the disallowance of interest expenses vis-a-vis the claim made u/s 80M of IT Act was relevant to A.Y.1997-98 and for prior period only. However, the genesis of proposed addition i.e. provision of section 14A has been inserted by the Finance Act 2001 at subsequent period. In other words the relevant section 14A was not in existence when the CIT(A) decided the issue of disallowance of interest expenses relevant to claim made u/s 80M, therefore, the applicability of provision of section 14A was never considered at any stage before. Accordingly any decision taken by an appellate authority under such circumstances has no bearing or relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds. The AO noticed that dividend income was exempt from tax in the hands of the receiver, as per the provisions of section 10(33) rws 115(o). The AO held that since the income was exempt from tax, expenditure incurred for earning of such income could not be allowed. On appeal, the Commissioner (Appeals) allowed deduction. On appeal by the revenue: HELD Chapter IV, provides five heads of income, the first four being specific heads of income, whereas the fifth one is residuary in nature. Income or expenditure has to fall under a specific head of income in which event the claim of an assessee can be considered under such specific head. In the instant case, the assessee appeared to have claimed deduction under section 57(iii). In order to allow deduction u/s.57(iii), the assessee has to show that the dividend income is assessable u/s.56 whereas in the instant case, dividend income was exempt from tax by virtue of the provisions of section 10(33). At any rate, section 14A, expressly prohibits allowance of such claims. (Para 22) Section 14A is part of Chapter IV. In other words, it applies to expenditure referable to any head of income referred to in section 14. It was contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as interest bearing) is Rs. 497 crore. Interest paid is Rs. 60.61 crore. Therefore the average cost of investment is 12%. The interest spent u/s 14A towards the investment for the purpose of earning tax free dividend of income is worked out as under: i) Investment in equity shares Rs.199,83,21,000 ii) Rate of interest (as calculated above) 12% iii) Total proposed disallowance Rs.23,97,98,520 In view of the above, the expenditure u/s 14A is estimated at Rs.23,97,98,520. This expenditure is disallowed for deduction from the computation of total income of the assessee." 4. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A) who has deleted the addition by discussing this issue in great length from page 2 to 20. The observation regarding deletion of addition in paragraph 4.3 at page no.20 is as under: "4.3 The matter has been considered. As brought out by the Authorised Representative, this issue has been a matter of contention in the preceding assessment year also i.e. assessment year 2004-05. The arguments of both the sides as also the facts of case are similar for this year also. Therefore, considering the factual position as also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 1996-97 had deleted the disallowance so made along with the deduction u/s.80M of the Act on the gross dividend receipt. Though in such a situation, the interest bearing fund are bound to merge that the assessee in capital which is non interest bearing fund. There is no dispute to the fact that the assessee having non interest bearing fund as under: (i) Share capital Rs.256.97 crores (ii) Depreciation reserve Rs. 5.81 crores (iii) Provision for NPA Rs.110.86 crores Total Funds Rs.373.64 crores (iv) Investments Rs.199.83 crores In view of the decision of the ITAT, Delhi Bench, in case of Maruti Udhyog Ltd. Vs. DCIT 92 ITD 119, nexus between the borrowed funds and investments can be said to be established only where it is shown that interest free funds are not available with the assessee. In the present case, there is no nexus of such kind proved by the ld. A.O. As per for the past history of the assessee, the Department has been taking the view that no expenses including the interest had been attributed to dividend for computing the deduction u/s. 80M of the Act. The assessee having non interest bearing fund as mentioned hereinabove and no nexus between borrowed fund and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee could not have claimed the loss of Rs.38.26 crore arising out of such transfer. The shares of GSFC were sold to Gujarat Sate Investment Ltd. (GSIL). In fact both, the assessee and GSIL are wholly owned subsidiaries of Government of Gujarat (GOG). Therefore it was a transfer between one subsidiary of GOG to other subsidiary of GOG. 2.2 It was further found that "Off Market" sales are not permitted by SEBI Circular No. SMDRP/POLICY/CIR-32/99, dated September 14, 1999. The Circular of SEBI as under was brought to the notice of assessee to emphasize that the sale of shares of GSFC to GSIL are not valid sale in the eyes of law." The assessee's reply was considered by the ld. A.O. The appellant had not paid STT on these transactions and transactions were off market transaction. The appellant had intimated to the BSE that GSIL has proposed to acquire 61.87% of the shareholding GSFC from GIIC vide letter dated 25.02.2007 prior to the date of transaction. The appellant also claimed before the A.O. that these payments were transferred from promoter to promoter covered u/s.47(iv) of the IT Act in category of no transfer. The ld. A.O. also analyzed the terms and conditions that agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , while transferring the shares, has not raised any objection to the manner of transfer, which under normal circumstances it should have, if such transactions were prohibited by law. 3.6. Regarding the strong exception taken by the Assessing Officer about the assessee having undertaken the "Off Market" transaction as a deliberate measure of saving S.T.T. and computing capital loss, in my view, this cannot be held against an assessee. In my view, the provisions of the Act encompass both the situations for the purpose of computation of capital gains, i.e. whether a transaction is subject to S.T.T. and whether it has not been subject to S.T.T. There is no express bar that capital gains can be computed only by invoking section 10(38). If the assessee has option of pursuing either of the method of disposing off the shares and computing its profit gains, the Assessing Officer will not be able to take adverse view if a particular view is taken. In fact, in spirit S.T.T. is only a way of collection of tax at source as far as capital gains is concerned. The actual taxability of capital gains and its quantum, otherwise, has to be determined by the substantive provisions of the Income-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares, M/s. GIIC has ceased to be the shareholder i.e. extinguished it rights. Thereafter, as and when M/s. GSIL transfers the shares, consequences would have to be treated in their hand and sale by M/s. GSIL, whenever it taken place cannot be treated as sale or transfer of the assessee. 3.10 Therefore, considering all the legal issues and facts, I think the Assessing Officer has been unjustified in rejecting the appellant's claim of capital loss of Rs.38,26,20,327/-. The appellant's ground of appeal is allowed." 9. Now the matter is before us. Ld. D.R. vehemently relied on the order of the A.O. and contended that the transactions were not routed through stock exchange and transfer took place on holiday itself. It had been intimating to SEBI. He claimed that these transactions are sham and bogus and no long term capital loss was there. Therefore, he prayed to confirm the order of the A.O. From the side of the appellant, ld. Counsel for the appellant relied upon the order of the CIT(A) and argued that ld. CIT(A) has considered all the facts of the transaction and deleted the addition. 10. We have perused the order of the authorities below. The ld. A.O. had not brought on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G.R. The entry was reversed by the same amount by debiting the p&l account during the previous year relevant to present assessment year i.e. 05-06. Further, while filing the return of income for the assessment year 05-06, the appellant suo moto disallowed the amount of Rs. 4,49,95,181/- towards reversal of service charges income. The claim for deduction of such sum had already been placed for A.Y.04-05. In A.Y. 05-06, this claim has been rejected by the A.O., which was confirmed by the CIT(A) in A.Y. 05-06 because the adjustments have been made in the books for the period of pertaining for A.Y. 05-06. The assessee filed revised return in A.Y. 04-05 and deduction of this income of Rs.4,49,95,181/- has been claimed by the appellant in revised return which has been accepted by the Co-ordinate Bench in ITA Nos. 4215 & 4378/Ahd/2007 for A.Y. 04-05. The operative portion of the co-ordinate Bench decisions is as under:- "12. We have heard the rival contentions and perused the facts of the case. The findings of the Ld. CIT(A) that the real income was very much in existence during the previous year 2003-04 i.e. assessment year 2004-05 has no validity in view of our decision in ground No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of facts the learned CIT (A) has deleted the disallowance made for AY 2004-05 & A.Y. 2005-06. It is submitted that the fact that investments have been made out of owned funds and no borrowed funds have been used and there is no fresh or additional evidence which require deviating from the stand taken for A.Y. 2004-05 & 2005-06. It is sub kitted it be so held now. 2.4 The learned CIT(A) has erred in directing the AO to apply rule 8D of the Rules to make the computation for disallowance. It is submitted that in the facts and circumstances Rule 8D of the Rules is not applicable. It be so held now. " 16. All the grounds of Assessee's appeal are revolving around the disallowance of Rs.13,74,01,132 u/s. 14A of the IT Act. The A.O. observed that the assessee made investment of Rs.1,29,25,78,858/- in various shares of the companies whether quoted or unquoted. The assessee had paid interest of Rs.17,77,61,139/- during the year on various loans taken to invest or to maintain these investments. As dividend income is not a part of taxable income as per Section 10(34) of the IT Act. Therefore, he found that the investments in equity shares bearing tax free returns amounts to diversion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier assessment years, the CIT(A) and upto A.Y. 1996-97, the Hon'ble ITAT has deleted the disallowance made by the A.O. of the interest expenses and allowed the deduction u/s. 80M on gross dividend basis. The manner of investments is a business decision and should not be questioned in absence of any material to the contrary. The investments have been made out of own funds, no expenses have been incurred to earn the income which is not includible in the total income of the appellant. The Hon'ble CIT(A) had deleted the disallowance u/s. 14A of the Act and had decided in favour of the appellant in A.Y. 04-05 & 05-06. From the other side, ld. D.R. relied upon the orders of the authorities below and requested to confirm the CIT(A) order. 19. We have gone through the order of the authorities below and heard the arguments. Rule 8D is prospective as held by the Hon'ble Bombay High Court in case of Godrej and Boyce Mfg. Co. Ltd. vs. DCIT, (2010) 328 ITR 81, the Court has held that Rule 8D is not retrospective and applies from A.Y. 08- 09. The investment in question has not been changed during the year. The A.O. has not brought on record any material / evidence which shows that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff market" would tantamount to valid transactions and whether the assessee would be entitled for long term capitral loss in the face of having not paid S.T.T. stands already discussed in detail for assessment year 2005-06 by the undersigned. As stated therein, I do not think an assessee is precluded from doing an "off market" transaction and if S.T.T. has not been paid as a consequence, exemption u/s. 10(38) will not be available and hence it will be covered under the normal provisions of section 45. The fact that there has been a transfer stands duly recognized by the companies, whose shares the assessee held, and there is nothing on record that any statutory or regulatory authorities objected to this transfer in respect of the mode of transactions, after having been conveyed to them. Merely because the appellant's manner of conducting transaction has led to a situation where it can make a claim of capital loss which is justifiable as per the provisions of the Act, cannot lead to the allegation that appellant has entered into an arrangement to avoid the taxes payable. This will be more so when we are dealing in a company which is 100% owned by the State Government. As state in pre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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